Stocks — Part XXVII: Why I Don’t Like Dollar Cost Averaging

pile of money

At some point in your life you may find yourself in the happy dilemma of having a large chunk of cash to invest. An inheritance perhaps, or maybe money from the sale of another asset. Whatever the source, investing it all at once will seem a scary thing as we discussed in Part XVIII.

If the market is in one of its raging bull phases and setting new records each day, it will seem wildly overpriced. If it is plunging, you’ll be afraid to invest not knowing how much further it will fall. You risk wringing your hands waiting for some clarity and, as you should know by now, that will never come.

The most commonly recommended solution is to “dollar cost average” (DCA)  your way slowly into the market. The idea being, should the market tank, you will have spared yourself some pain. I’m not a fan of this strategy and will explain why shortly, but first let’s look at exactly what dollar cost averaging is.

When you dollar cost average into an investment you take your chunk of money, divide it into equal parts and then invest those parts at specific times over an extended period.

Let’s suppose you have $120,000 and you want to invest in VTSAX, the total stock market index fund we’ve been discussing throughout this Series. Now having read this far in it, you know the market is volatile. It can and sometimes does plunge dramatically. And you know, therefore, this could happen the day after you invest your $120,000. While unlikely, that would make for a very miserable day indeed. So instead of investing all at once you decide to DCA and thus eliminate this risk. Here’s how it works.

First you select a time period over which to deploy your $120,000, let’s say the next 12 months. Then you divide your money by 12 and each month you invest $10,000. That way, if the market plunges right after your first investment you’ll have 11 more investing periods that might perform better. Sounds great, right?

This does eliminate the risk of investing all at once, but the problem is that it only works as long as the market drops and the average cost of your shares over the 12 month investing period remains on average below the cost of the shares the day you started. Should the market rise, you’ll come out behind. You are, basically, trading one risk (the market drops after you buy) with another (the market continues to rise while you DCA meaning you’ll pay more for your shares). So which risk is more likely?

Assuming you were paying attention while reading the earlier Series posts, you know that the market always goes up but it is a wild ride and no one can predict what it will do in any given day, week, month or year. The other thing to know is that it goes up more often than it goes down. Consider that between 1970 and 2013, the market was up 33 out of 43 years. That’s 77% of the time.

At this point you are probably beginning to see why I’m not a DCA fan, but let’s list the reasons anyway:

  1. By dollar cost averaging you are betting that the market will drop, saving yourself some pain. For any given year the odds of this happening are only ~23%.
  2. But the market is about 77% more likely to rise, in which case you will have spared yourself some gain. With each new invested portion you’ll be paying more for your shares.
  3. When you DCA you are basically saying the market is too high to invest all at once. In other words, you have strayed into the murky world of market timing. Which, as we’ve discussed before, is a loser’s game.
  4. DCA alters your asset allocation strategy. Suppose you had $100,000 and your allocation was 50% stocks, 25% bonds and 25% real estate equity in an investment house. Now you decide to sell the house, planning to invest the $25,000 from it into your stocks for a 75/25 stock/bond allocation. If you decide to DCA, your real allocation in the beginning is not your 75/25  target. It is 50/25/25: 50% stocks, 25% bonds and 25% in cash.  You are holding an outsized allocation of cash sitting on the sideline waiting to be deployed. That’s OK if that’s your allocation strategy. If it’s not you need to understand that, in choosing to DCA, you’ve changed your allocation in a deep and fundamental way.
  5. Unlike stocks, the cash you have waiting to invest is not earning dividends. For example, VTSAX pays ~2% in dividends.
  6. Your cash should earn some interest, but with rates being under 1% and inflation running at around 3%, each year your cash effectively loses ~2%. Combined with the dividends not collected (Point #5) that’s a 4% drag on your returns.
  7. When choosing to DCA, you must also chose the time horizon. Since the market tends to rise over time, if you chose a long horizon (say, over a year) you increase the risk of paying more for your shares while you are investing. If you chose a shorter period of time, you reduce the value of using DCA in the first place.
  8. Finally, once you reach the end of your DCA period and are fully invested, you run the same risk of the market plunging the day after you are done.

What to do instead?

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Well, if you’ve followed the strategies outlined in Part VI, you already know whether you are in the wealth accumulation or wealth preservation phase.

If you are in the wealth accumulation phase you are aggressively investing a large percentage of your income. In a sense, this regular investing from your monthly income is a form of unavoidable dollar cost averaging and it does serve to smooth the ride. The big difference is you’ll be doing it for many years or even decades to come.

But you are putting your money to work as soon as you get it in order to have it working for you as long as possible. I’d do the same with any lump sum that came my way.

If you are in the wealth preservation stage, you have an asset allocation that includes bonds to smooth the ride. In this case, invest your lump sum according to your allocation and let that allocation mitigate the risk.

If you are just too nervous to follow this advice and the thought of the market dropping shortly after you invest your money will keep you up at night, go ahead and DCA. It won’t be the end of the world.

But it will also mean that you’ve adjusted your investing to your psychology rather than the other way around.


Addendum 1: 

Most people are effectively using DCA as they contribute to their tax-advantaged accounts such as 401Ks during the year.  But if the disadvantages to DCA described here resonate with you, our friend The Mad Fientist offers a strategy to eliminate it: Front LoadingAs you’ll read, there are other advantages to this approach beyond avoiding DCA.

Addendum 2:

Mike & Lauren explore the emotional side of DCA in this video: What is your emotional threshold?

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  1. Roland says

    Just what I needed to make me feel better about investing a lump sum (for me anyway) now and not try to time the market.
    I thought about it a lot in the past days and came to the conclusion that either I believe in everything I learned from this blog and the many hours verifying what you say at other sources or I don’t.
    So if my mindset is that of an investor ready to start my wealth building than there is no other option but to go ahead and do it.

    • Dividend Growth Investor says

      My research has also shown that Dollar Cost Averaging does worse than Lump Sum investing on average. This of course is on average – someone’s specific situation will differ, since it will be at different spectrums of the probability of outcomes.

      However, this doesn’t take into consideration the fact that the person who received the lump sum doesn’t read your article, and does something stupid with the money without doing much research – like plunging the money in risky tech companies, buying real estate, or buying “investments” they don’t understand. For many investors who get that lump sum, there are pressures to put the money to work right away, and they might not have had the time to really research how to allocate the money. To properly research this, it would take at least several months. This is why I emphasize say 2 years – the important thing is to not do too much initially and let that amount of wealth sink in first.

      You know from your research that people are risk averse as well – on a $1M inheritance, they will suffer more emotion losing $300K than doubling the money to $2M. If the first person decides to “cut their losses” after initial loss of $300K, and ends up getting out of stocks/investments altogether, then lump sum would have been terrible for them. On the other hand, someone like you, with years of experience investing, might not care about temporary fluctuation.

      Understanding that your specific returns and outcomes could likely be different than the average is the important thing to think about. Just like the idea that markets return 9 – 10%/year, when looking at the date since 1926, doesn’t really mean you will get 9-10%/year every single year.

      As a stock picker, I know not all investments I am interested in making are available at good prices all the time. Hence, if I received a lump-sum amount, I would spread it out over say 12- 24 months. That would allow me time to research companies, get prices over time, and buy over time.

      • Tom Coony says

        Many people here may remember a famous article that Warren Buffett published in the NYTimes in the fall of 2008. (Sorry I can’t give a link, but it is easy to find.) If you recall, at that time US stocks had plunged. He responded: “I’m buying American”, meaning that he was putting virtually all of his personal money into US stocks because the valuations were so attractive. He was emphatic that he did not know what the stock morket would do in the short run — indeed it continued to plummet until bottoming out in March 2009 — but long run it was great to be able to buy stocks cheap.

        That’s a great story and, for those who acted on it, a very profitable one.

        But isn’t it also a refutation of the point of this article? If you are always fully invested then you cannot really take advantage of market drops. Was Buffet implicitly endorsing market timing?

  2. GK says

    Thank you for this. I was just recently in this position and have been hesitant with the market so high, etc. But I finally pulled the trigger and dumped it in and now simply ignore it. 🙂

  3. Jason says

    Fortunately I’m extremely impatient, and could never wait a whole year to invest a lump sum of money! I agree with your logic, although I must admit when I think about my own version of dollar cost averaging, I think of it more as desperately trying to find more capital to invest when the market falls!

  4. Mr. Frugalwoods says

    I’m a huge fan of DCA.

    Just not for me, for all of the reasons you mentioned.

    But for my friends who spent all of 2009-2011 on the sidelines with cash because of anxiety and indecision… anything that will get them in the markets sooner rather than later is a win.

    And I have a feeling that goes for the average investor as well. People delay investing over and over, thinking the market is overvalued. I’m seeing is again these days.

    Though honestly, just having some sort of “plan” and sticking to it, is 90% of the battle. DCA somehow feels safer to a lot of folks… which is a small tax to pay in order to get them active in the market now.

    • Stephen A. Schullo says

      So am I a huge fan of DCA. Why is there even a debate about DCA.
      DCA is a strategy for more and more people who don’t have a bundle to invest now. It is the fundamental skill to go from 0.00 to wealth! Heck, I never had any money until I was in my 40s and that bundle was because of DCA. But I kept DCA for the rest of my working career. Collins is unnecessarily discouraging. I don’t understand why he fails to see that not everybody starts out with a bundle of money, heck just about everybody starts out with zero.

      • jlcollinsnh says

        You seem to misunderstand what DCA is.

        It is a method of investing a lump sum.

        What you are describing is the process of investing cash as it becomes available. This is a process I fully support and it is a cornerstone of the Wealth Acquisition stage described elsewhere in this Stock Series.

        I also agree with Mr. Frugalwoods. If DCA is the tool people need to become comfortable investing, it serves a useful purpose.

        But as I also say in this series, it is better to adjust your psychology to the optimal investing strategies than to adjust the strategies to your psychology.

        • Stephen A. Schullo says

          Hi JL,
          Hey, thanks for the response!

          We’ll just have to agree to disagree. Yes, I understand the psychology because as you write, the market goes up 77% of the time from 1970 to 2013 (that time frame had many bull market years too. I wonder what the ratio between up and down years are going all the way back to 1928).

          Also, DCA does not mean that money is in cash. Not sure where that came from. I never had my defined contribution (403(b) money in cash during most of my working years because I had no lump sum to invest. I DCA straight into stocks and bonds. Cash vs. stocks is a no-brainer of which is going to grow more.

          Still, I remain confused about your title. Do I dare offer alternative titles?

          How about “Now that you have a bundle of money–nine reasons to use the lump-sum strategy.” Since you already listed nine of them.

          Curious: Why did you not write a chapter in your book about DCA? As you say DCA is “useful.” IMO, I think it’s much more. I think it is fundamental to building wealth, but I guess that’s my experience.

          I must believe the psychology of your words that you do not like DCA. I said before, it is discouraging as it pits one strategy against the other. If people do not have a lump sum to invest, what do they do? Sooo, how about a chapter on DCA: Possible title could be: “Five (or whatever number suffices) reasons to use DCA.” It would include more people which never had a lump sum during our working years.

          Titles and words are powerful. DCA remains a fundamental and powerful tool, not just useful, for most people with a little discipline, living below their means, and earning $50,000 or more a year to become financially independent.

          As the FI and FIRE community has proven, it is easy to build a million-dollar portfolio by the time one is 30-40. But for the rest of us, we can build that same million-dollar portfolio by the time we are in our 50s. With people going to live to 100, achieving financial independence at 50 is also a great achievement.

          Have a great day,

          • jlcollinsnh says

            Hi Steve…

            Chapter 26, in Part III of the book, is about DCA. But I’m afraid you won’t like that either. It is much the same as this post. 😉

            I certainly agree that achieving FI at 50, or any age, is a great Achievement. 🙂

          • Vic Wong says

            Hi Steve and JL,

            I know I am late to this comment, but this unresolved misunderstanding is particularly frustrating to me because JL’s first response – which should have been completely satisfactory – seems to have been totally ignored, and so the misunderstanding persisted unnecessarily. So at the risk of just sending this conversation around in another circle, I have to at least try and address it in even clearer terms.

            Stephen, you have misunderstood what dollar cost averaging is. What you described is how we save a portion of our regular income and then we invest it on a periodic basis. Whilst the act of investing periodically is common with the strategy of DCA, it is NOT DCA.
            DCA is an investment strategy that is ONLY available when you have – as JL stated in his first reply to you – a “lump sum”; a relatively large, one-off amount of money that you want to invest, NOT the amount you would invest every few weeks from savings out of your weekly pay. This lump sum could be from a lottery win or an inheritance, or maybe you’ve simply accumulated a large amount of savings in your bank account because you didn’t know how better to invest it.
            If you use the DCA strategy, you are choosing to invest this lump sum in small amounts, spread out over a longer period of time in order to eliminate the risk of making a huge loss/missing out on gains if you were to invest your whole lump sum in one go, only to have the market crash soon after.

  5. ChrisFliippingADolla says

    This is a great post, especially now when the market is raging. Instead of DCAing, we are piling any extra money into our mortgage. I’ll take the 4.25% guaranteed return. We are still putting money into our 401k, but we are also saving other money for future appliance issues.

    The deduction that I get from interest is too much of a “I got this 35k car for only 30k so I really saved 5k” kind of attitude for me.

    • Chris says

      “The deduction that I get from interest is too much of a ‘I got this 35k car for only 30k so I really saved 5k’ kind of attitude for me.”

      This example doesn’t make much sense to me. You have to pay taxes and you should look for ways to do lower that spend. And deducting interest is a great way to do that especially in high tax brackets. I get paying off the home for piece of mind, but investing versus paying off your home sooner makes more financial sense from a pure value point of view. However, some greatly value being out of debt even if it costs a little bit of return.

  6. David W says

    I looked into DCA years ago and found that it was basically the same as lump sum investing, if not slightly worse. It seems every financial advisor I’ve met with uses it as a selling technique with made up numbers to support it (usually very volatile stocks and convenient timing to support their pitch). For those interested in the data, I included it in my signature link.

    • Mark AW says

      David W, it is nice to see real world examples, instead of the “Prudential” example where prices always fall in the middle years. A different but similar strategy that opposes the lump sum payment is value cost averaging (VCA). Read more about it here: I would be interested to see how those numbers come out in your spreadsheet. This would also complicate the basic analysis you did, but what about considering dividends and capital gains disbursements when considering lump sum vs. DCA. Or also adding the element of holding the balance of your money in a high yield savings account (money market account) while you DCA. Or adding in trading fees and fund expenses. Or, one could just key in on points 1 and 2 and call it a day by settling on the lump sum method.

  7. ak907 says

    Wow this is great, something that I could have used in the past. I really love the 77% vs 23% calculation, great way to look at DCA with lump sum investments. Great article!

  8. Storugglan says

    “But it will also mean that you’ve adjusted your investing to your psychology rather than the other way around.”

    DCA is certainly a loser’s game. But perhaps it gives people the time to adjust their psychology and not selling as soon as the markets drops. The latter could be a catastrophe in the case of lump sum investment followed by a severe drop.

  9. AS says

    Amazing article Jim. I have some money saved and I was personally debating the same question – Should I invest all at once or try to do DCA. I also came to same conclusion that by DCA basically you are trying to psychology feel better but if you are a long term investor and looking to be invested for years ahead then DCA doesn’t matter.

    I found one interesting thing which might be of interest to readers of this blog and you. If someone has invested some dollar in S&P 500 in Sept 2007 / Oct 2007 which was the high point of the last bull market before historic crash (and arguably one of the worst time an investor can choose to put money in the market in last decade or so) still at the end of Oct 2014 he or she would have got 52.5% return or 6.1% annualized return. Considering historical return of around 10 percent annualized for S&P this is not bad. And this includes one of the worst fall you could have witnessed immediately after you invested the money.

    Basically as you keep saying in this blog, the key to investing success is to stay invested in market for a long time and in minimizing the cost of investing. Hope this helps. Your blog is a true inspiration for me and I cannot thank you enough for all the great work you are doing. Thank you so much.

    PS – I used some web calculator to come up with this numbers. It may not match to the exact digits but still you will be close to the numbers displayed above.

    • D says

      Thanks for sharing that piece of math here, very useful!

      I have been holding on to some savings as I was not sure if I needed some additional cash, but now looks like I really can invest a bit more and it has accumulated into approx. 15,000 dollars. Not a lot, but with reading this article and some of the comments I’m now comfortable just putting it in my investments all at once.

  10. Lance says

    I find that the market tends to drop rapidly but never increases as rapidly as it dropped. It will increase but it will take time. How often does the market sit at the top versus the bottom? Well if more years than less (77%) are higher then you are going to be investing more often in an upper market. Hard to know when it is at the bottom, but I definitely know when it is not at the top and that is when I invest more. I always invest monthly, but I also have cash on the side for larger infusions during the drops which always come as well.

  11. Jon S. says

    Cool Hand Jim…providing ongoing sage advice. “Time in market…not timing market” is an often used phrase echoing this sentiment. The Vanguard Total Stock Market kicks out a 2+ % dividend to boot I believe.

  12. Jone says

    This hits home. There is another potential downside risk to DCA’ing but I am not sure of the term. Perhaps someone else can name it. A story….

    Early last year a coworker in her late 40’s sold her recently deceased parents home netting a bit over $100k. She wished to put the proceeds in “the market” but didn’t know which market (i.e., stocks, bonds, commodities, real estate, or something else). I don’t know her life history but I do know she is divorced, earns about $80k/year from her job, has no other sources of income, invests in the company 401k (not sure how much), and has a mid-20’s year old son who lives on his own.

    She asked my advice. I suggested she pay off any credit cars she might have, increase her 401k contribution to the max for the remainder of the year, open a Roth with Vanguard and place $11,000 in the account (holding 100% VTSAX in tax years 2013 and 2014), then place the remaining $$ in a taxable account holding VPAIX (PA resident) while she considered her options.

    That would have given her roughly a 40/60 stocks/tax free bond ratio in the two Vanguard accounts (not sure her 401k AA) and she would still have the flexibility to sell the bond fund for other investments if she so chose. Perhaps a bit conservative, but she didn’t want to “lose any money” in the market.

    We spoke again about two weeks ago at the fall picnic. Her words are in quotes: She didn’t open a brokerage account but she did use “about $30,000” to buy a “much needed” new car for herself, gave her son “about $10,000” to help him purchase a pickup truck, paid off “some” of her credit cards, and donated “some” to her church for some kind of necessary repairs to their sanctuary. She says she still has “some” in her local savings account…..that she is still not sure what to do with.

    So, what’s that risk called?

  13. David says

    Mr. Collins–great post. I recently also came into some $$ (about 200K) from some investments I sold after taking control of my finances from a financial planner. I have a habit of “tinkering” including investments, and after reading all of your Stock Series and this one, I have come to realize that investing it all in VTSAX is the best thing for our taxable $$-I dabbled a little trying to construct a portfolio of ETFs, used Betterment, and finally realized that VTSAX is the way to go. It’s simple, effective and frees up time to do the important things–i.e time with kids, wife, and my practice (MD).
    Keep up the good work, and I look forward to all the future posts on your blog.

  14. Kathy says

    DCA is fine if you don’t have a lump sum to invest. Getting started by putting in a set amount each month into a mutual fund is a great way to begin. But having a large amount of money sitting on the sidelines is such a waste. I think the biggest reason not to let the money sit outside of an investment account is that it soon becomes very easy to dip into the funds to buy something you do or don’t need. When it’s gone, it’s gone.

    • Darrell says

      I was looking for this response. I think it is better to save 100% of what you can save as early as you can save it, which goes against DCA principles. That said, I’m considered a DCA investor. I just don’t happen to have $17,500 to invest into my 401k, so I invest is in equal installments as I earn it. So by definition, I’m DCA’ing, but never had the financial baller-ness to put up $17,500 all at once.

      I wouldn’t keep money sidelined that is earmarked to invest.

  15. Big Guy Money says

    Hey Jim,

    I do agree with the math, and a seasoned investor will be much more likely to be able to make the decision emotion-free. I know when I began taking investing seriously, I’d have a hard time mentally processing the concept of lump sum. Several years later it’s gotten easier to implement. For me, investing $120k would still give me some heartburn just for the fact that it’s a little less than double our current portfolio.

    My question is this:

    Have you always been comfortable with following the math and investing lump sums as they come available, or was there a time earlier in your investing life where you saw investing a large lump sum, say your $120k example, all at once as something that would give you pause?

    • jlcollinsnh says

      Hey Big Guy…

      What an interesting question!

      Yes, I was always comfortable following the math, once I looked at it. The thing is, when I initially came across DCA many years ago, I didn’t look. Or at least not deeply enough.

      I probably saw it first from some fund company and I seem to recall they had a simple chart showing it was effective. Of course the catch was that the prices shown were above and below the initial purchase price but averaged lower so DCA worked in the example. At the time I didn’t think to question this one sample of “what if” analysis.

      Plus the concept seemed like common sense. 😉

      I think what prompted me to look deeper was that, like Jason above, I was impatient and I hated having unproductive cash sitting around. So I figured I had better be sure DCA was a good idea.

      But, as I said, it is not a horrible idea either and I do agree that for those investors who would be too paralyzed to invest without it and/or need time to adjust their psychology, it can be a useful tool.

  16. JT says


    Found you last week after random search for Michael Bluejay’s housing calculator. Really enjoying your work and and website.

    I’d add that I can be a bit hybrid in waiting for a significant market decline, then going all in. Lump sum timing, ha? Great post and thanks.

  17. jian says

    When we contribute monthly into our 401Ks, IRAs, Roth IRAs, we are already doing DCA without thinking about it. My suspicion is it’s just another way to get people over their fear and paralysis and get into the market.

    So much of what we do in “investing” (and pretty much everything else) is based on emotion, not rational analysis as classical economists would have us believe, I’m now convinced that little psychological tricks such as DCA are useful tools to a lot of people. Readers of this blog and of the MMM blog tend to be more analytical and data-driven, myself included and I’m proud of it :), but most of my friends and I believe majority of the population make decisions based on emotions and mood of the moment. We may think it’s unfortunate, but that’s just human nature.

    So here’s a quick example. I gifted a share of IBM stock to a friend in early October when it was still close to $200 and told her to sell it as soon as she gets possession and buy an SP500 index fund like VTSAX. On Oct. 20, I checked in with her, but she said she couldn’t sell because share price came down to $161! So let’s see how the 2 compare between Oct 20 and Nov 6:

    20-Oct 6-Nov % change
    IBM 161.46 161.59 0.08%
    SPX 1904 2031 6.67%

    Of course market could have easily been going down, but the point is we take on more risks when we keep individual stocks instead of diversified indices. Doing nothing seems “safe”, but it really isn’t; inaction in itself is a risk. But good luck explaining this to your friends! I myself have done it too and I still have some loser stocks in my Roth that I know I should get rid of but don’t want to, since there’s no Capital Loss Harvesting there anyways. It is really hard to be rational, is what I’m trying to say. 😀

  18. FrugalFamilysJourney says

    Nice points made…In a volatile market or a down market, dollar cost averaging might be a good idea, but in a bull run (similar to the one we’ve been on for several years now), one is dollar costing averaging up!

    For most, the true benefit is the automatic investments made on a consistent basis. For many undisciplined investors, if it is not automatic, it may not happen consistently. For these individuals, the often end up losing out of potential gains (especially in an up market).

  19. Even Steven says

    Don’t we all practice DCA in our 401K and any time we auto draft or save cash to the end of the year for an IRA account? So your proposal would be to invest all up front and the beginning of the year on Jan 2? I’m ok with that being the answer, just not sure if that is possible for 99.9% of the people out there.

    • jlcollinsnh says

      Hi ES…

      Seems you missed this part of the post:

      “If you are in the wealth accumulation phase you are aggressively investing a large percentage of your income. In a sense, this regular investing from your monthly income is a form of unavoidable dollar cost averaging and it does serve to smooth the ride. The big difference is you’ll be doing it for many years or even decades to come.

      “But you are putting your money to work as soon as you get it in order to have it working for you as long as possible.”

      But this article wasn’t about how to invest in IRAs or 401Ks. It was about investing a lump sum.

      That said, yes, for those who are able to, fully funding these accounts at the beginning of the year would be beneficial for the same reasons investing a lump sum all at once is the better strategy. Obviously, for those for whom it isn’t possible, this is a mute point.

  20. Sylvain says

    Hello Jim – nice post.
    You could also add to the downsides of DCA:
    – Renounced dividends: DCA forgoes the upside related to dividends in the stock/index you invest in. VTSAX is ~2% dividends.
    – Inflation: While inflation in the US is low, it is still around 1.5%/2%. Leaving that extra cash on a checking/savings account at 0.1% through the DCA time horizon is like giving away 1.5% /2% every year.

    • jlcollinsnh says

      Hi Sylvain…

      Excellent points!

      In fact I’ve incorporated them into the post as points #5 & #6. I reworded them to fit the flow of the post, but the concepts are there.


  21. Done by Forty says

    Really great stuff, Jim.

    As you said, the regular income is what helps smooth the ride. Because I get a paycheck and contribute regularly to a 401k, IRAs, HSA, etc…even if the market tanks, I am going to get the benefit of DCA with that “paycheck” money. Investing a lump sum all at once is, in a way, diversifying my investing approaches: this bucket gets invested all at once today, this other bucket gets invested over time. So in that way, it’s less risky and covers both scary scenarios (market going up, market going down).

    It’s all mental tricks, of course…but this helps convince myself into doing what I know we should do.

  22. Daniel says

    This encouraged me to put the $8,000 in my HSA into the market. During the September/October drop I put $10,000 of cash in my Roth in the market. Had $5,000 of that sitting in cash since March of 2013, foolish!

  23. Smithers says

    Are you serious?

    US markets at all time high, Europe and Japan on their way into recession (look at commodity prices)…

    No way, I will put in my life savings at these levels. Call it market timing. I call it capital preservation.

  24. Jone says

    All time highs are a great time to invest. All time lows are even better. Somewhere in the middle is a darn good time too.

    My fellow investors and I have have enjoyed all time highs several times this year in VTSAX (and muni bond funds aren’t doing too bad either). At the beginning of the year the talking heads were screaming that the stock market was at unsustainable levels give earnings, inventories and/or the readings of sacrificial animal entrails. They were also concerned about the unsustainable levels of debts in PA, CA and several other states and territories financials…let alone the actions of fed on muni bond rates. OMG! The sky’s gonna fall in BOTH markets!!

    Fact of the matter is that VTSAX has hit all time highs forty three times this year. The Barclays PA Municipal Index (basically, the muni bond market) is also up 8.01% in the past year. Read that again….all time highs…forty three times… one year.

    Yes, the market might crash tomorrow (blame Obama & Congress). Of course, it also might go through the roof (credit Obama & Congress). But, it will probably be just another flatish to slightly higher day on Wall Street with everyone complaining about the darn government.

    Warren Buffet said in the short term the market is a voting machine but in the long term it is a weighing machine. Invest the money and go fishing for the next couple of decades.

  25. Andrew says

    Question about asset allocation — people normally talk in terms of percentage of net worth in stocks vs bonds, 70/30, 50/50, 80/20, whatever… but I think for the financially independent/early retired, it seems more useful to think in terms of years of expenses allocated to each asset class. So say someone has 25x or more saved, you might recommend putting 1x in cash, 4x in bonds (VBTLX), and the rest in stocks (VTSAX). I’m curious what your thoughts are about thinking in these terms, and how many years of expenses an early retiree should have stashed in cash and bonds to feel secure in the event of significant stock market decline.


    • jlcollinsnh says

      Hi Andrew…

      Using your example, you’d have an 80/16/4 allocation.

      But I’m not sure I’m understanding the functional difference?

      • Andrew says

        I was just thinking in terms of when you’re actually going to need to spend the money.

        So going back to the 25x 80/16/4 example, money that you need to spend in years 0-1 would be in cash, years 2-5 in bonds, years 6+ in stocks. With this, 80/16/4 and 20/4/1 are the same thing — there is no functional difference.

        But now lets say your portfolio grows and now you have 50x. If you’ve been rebalancing regularly and maintaining the 80/16/4 allocation you’d now have years 0-2 in cash, years 3-10 in bonds, and years 11+ in stocks.

        If however you were rebalancing according to when you need the money you’d still have years 0-1 in cash, years 2-5 in bonds, and years 6+ in stocks but your allocation would now be 90/8/2.

        So my question is how much money do you need in the short-, intermediate-, and long-term and shouldn’t you allocate accordingly? If you only need 1x in the short term, why hold 2x when your portfolio grows rather than just maintain 1x?

      • jlcollinsnh says

        Ah. Got it.

        I actually toyed with a similar idea I called the
        “The Wealth Building with Cash Insurance Portfolio” described at the end of this post:

        The problem I had, and that I think would apply to your approach, is how do you replenish the cash portion after it has been spent meeting your needs?

        But looking at in another way, suppose the bonds in your portfolio represent an emergency ration again a major deflationary event like the Great Depression.

        If you have 1m, you might have a 50/50 allocation and a 4% withdrawal for 40k per year. Now if the depression comes and your stocks drop by 90%, you still have your bonds paying ~3% on your 500k in them: 15k. You have to cut back, but in a world with newly deflated prices 15k should be enough. Plus, of course, your bonds would have appreciated.

        But suppose things roll along OK and now you have 2m, still at 50/50. That’s now 1m in bonds. At this point you might say, I really only need 500k in bonds against the worst case and I can have that with a 75/25 allocation. That leaves more money in stocks to fuel more growth.

        Now your investments grow to 4m. If you keep your bonds at 500k your allocation is now 87.5/12.5. And so it goes.

        So, yes, I think it is a workable concept and an interesting way to think about it.

        In a related vein, you might be interested in my recent conversation with Joe about whether rebalancing is really needed. You’ll find it in the comments to this post:

  26. Richard C. says

    I totally agree that in most cases DCA makes less money. I read the Vanguard paper, but it explained to me that I should use DCA because the lump sum only wins 66-67% of the time and only by about 2.3%. I would rather be safe and take the only slight difference. The paper also says DCA wins 33-34 percent of the time, which is still better than any casino, since losing means still having money invested and growing. I think anyone who wants to jump in with a lump some will most likely still make money if they stay the course, but normally people don’t just have giant sums to hold on to or invest. I think the thing that is very seldom discussed is that DCA shines most in single stock investing, with something like a DRIP that makes it more affordable and with little or no buy costs. DCA is best used there to protect you from buying too high. Indexes are naturally safer by the built in diversification, so lump some is safer. I really want to see more people discuss wealth building with services such as Computershare to build a diverse portfolio in great companies ( large moats) over time.

  27. DivHut says

    Markets don’t always go up either. The Japanese Nikkei was close to 40,000 back in 1989 only to be at around 18,000 in 2014. That’s 25 years of no growth. Imagine piling all or most of your cash back in the 80s. Don’t completely discount the value of DCA.

  28. VS says

    I agree with the logic against DCA. However, at this time all ratios (PE etc) indicate the market is “overheated” compared to the “usual”. Even though I am not making the case for market timing, it certainaly feels risky to invest a lot of money at one time if you had it, especially if you are retired or close to retirement?
    AS showed in the post above (November 12) that even investing at all time high in 2007 would have made a good return by now after the crash. But you needed the market to recover… So it depends what exactly is your risk tolerance at the time and especially those who are not in the wealth accumulation phase may find DCA could be advantageous.

  29. Kathleen says

    I love your website and have been reading quite a bit. I’m in an unusual situation. I’ve just become widowed at 47 years old. I have two teenage children. Fortunately I have two rather large life insurance policies, to the tune of over $1M. I have college funds for my kids and will receive Social Security payments until they are 18. I also have a substantial 401K account of my husbands (that apparently I should rollover asap to a Vanguard IRA?!), some investments through UBS and $350K cash in savings that I have hesitated to invest for a long time (I know, not smart)! I am not working and I have no mortgage.
    Would you recommend in my situation doing your 75%/25% with VTSAX and VBTLX?
    Do you think I should use Betterment? I don’t want to invest any more through advisors. In your article, you said you didn’t like DCA but you talked about a much smaller amount of money. Would you still recommend investing over $1M in the same way?

    Any advice you could give me would be very appreciated!
    Thank you,

    • jlcollinsnh says

      Hi Kathleen…

      First, I am very sorry for your loss.

      Second, after such a huge shock, don’t feel you have to act on this financial stuff ASAP. It will be fine sitting just as it is until you are ready, both emotionally and by having had a chance to educate yourself.

      I’ve written about Betterment and like them for certain situations as you can see in this post:

      My concern for you, with the amount of money you are taking about, is that even their modest fees will add up to lots of $$$$.

      As I say in that post, if you can read thru the Stock Series here:
      and feel comfortable with your understanding of the ideas, there should be no reason you can’t invest directly with Vanguard less expensively.

      As for deploying the money, my take on DCA is the same regardless of the amounts. Invest and let your chosen allocation mitigate the risk rather than trying to time the market.

      As to what that allocation should be, that is a very person choice only you can make. I offer ways to think about it here:

      What is right for me may or may not be right for you.

      I would suggest that you consider your SS income as a part of your bond-side. That is, SS helps mitigate the volatility of stocks in a similar fashion as bonds.

      To do this, you would think about the implied value of the SS payments. For instance, to generate the same amount using the 4% rule how much would you need. If SS is paying you 20k per year, multiple by 25 = 500k. That’s what you’d need to generate 20k at 4%. Now think of that 500k as part of your overall portfolio. Make sense?

      Finally, yes, I would roll the 401k into a Vanguard IRA. More control and very likely better and less expensive investment options.

      Hope this helps!

  30. Brett says

    Hi Jim- I’ve spent months and months reading thru your site and reading about all the people who’ve invested into VTSAX and/or some combination of your portfolio ideas.

    I’ve finally taken the plunge. I just dumped $65k into VTSAX (had about $4k in VTSMX), $15k into VBTLX and $10k into the VMMXX. I’ve got another $65-$70k in a Schwab account, $300k+ in combined IRA’s (my wife and I) and $18k in my current company Roth 401k.

    I wanted to get the money working for me now and I will slowly contribute each month a little bit more and look forward to the day I can live off the returns.

    Thank you for the insight and advice. You do an amazing job and I look forward to reading more every day.

    • jlcollinsnh says

      Welcome Brett…

      Thanks for checking in and letting me know. I’m glad to hear you have found value on my site and I appreciate the kind words.

      More importantly, I applaud you for taking the time to think about, absorb and understand what you read before acting.

      Here’s to a prosperous future!

  31. Joel says

    What about ultra-short term DCA? For example, instead of DCA over a year, over 1-2 weeks? Can the same upside you see as an argument against DCA over a year be said about all 1-2 week periods?

    • jlcollinsnh says

      I think the same principles apply regardless of the time frame.

      That said, a 1-2 week period would have very little of the risk mitigating DCA practitioners seek.

  32. Andrew says

    DCA is market timing by another name. In my experience market timing is insidious. I find it very difficult to eliminate no matter how much I try, it somehow always manages to show up in my investing. For me it shows up in the form of letting cash pile up, for others (and I pity those fools) it shows up in the form of jumping in and out of the market. Thankfully I’ve never been tempted to play that game. But I always have ample reasons for why investing ‘later’ is better than investing ‘now’. My current cash position is only 4% of my total, but that represents 1.5 years of living expenses. Do I need that much cash on hand? Well my inner market timer says I do because it knows that the stock market is currently trading at a premium so I’ll need the cash later to buy more shares after the market corrects and I can get them at a fair price or maybe even a discount. It’s crazy talk, I know, but I listen anyway.

    • jlcollinsnh says

      Interesting perspective, Andrew.

      You are spot on regarding market timing and DCA.

      My feelings about cash are the very opposite. I see it as “dead” money slowly eroding away. I feel compelled to put it to work ASAP.

      Fortunately, this not only soothes my need, it is statistically the best move. Just lucky, I guess. 🙂

  33. David says

    Most great traders throughout history have shared the same philosophy “Feed your winners, not your losers.” If it was good enough for them. it is good enough for me.

    These great traders also believed that it was wise to keep some powder dry and if the market does fall hard, you have the money to buy your favorite stocks on sell.

    Thanks for sharing,

  34. MLH says


    Thanks so much for your blog. I’ve read just about every post in the last month or so.

    I agree that DCA for a lump sum just doesn’t make sense when you really look at it. Take this example (which builds on your 8th point):

    Suppose there are two investors that are nearly identical. They are both 60 years old, have $1MM to invest, same annual spending, and same appetite for portfolio risk. Based on that, their “perfect” asset allocation is 75% stocks and 25% bonds. One of them happens to already be invested that way, and the other is holding all cash. Many financial advisors would advise the investor with cash to DCA over 6-12 months, but no one would recommend the investor already in the market make any changes. What is the rationale to treat these two investors differently?

    • jlcollinsnh says

      Thanks for checking in MLH and letting me know.

      As for your scenario, none that I can think of. 🙂

      Actually, DCA does provide distinct CYA (cover your ass) advantages to the advisor:

      1. If the market does plunge shortly after the program has started, the advisor avoids blame and can say, “See, I protected you.”
      2. If the market continues to rise, the advisor can say, “See how well my investment choices for you are doing.”

      Rare is the customer who will see the fallacy in #2. Rare is the advisor who won’t trade subpar customer performance for more CYA potential.

  35. Horatio Spifflewicket says

    Just a little extra ammunition in your DCA arguments…

    It looks like even Vanguard isn’t a fan of DCA for lump sum investments:

    Vanguard Paper on Dollar Cost Averaging

    If (for some reason) the link doesn’t work, I just put “Vanguard on Dollar Cost Averaging” into my favorite search engine.

    • jlcollinsnh says

      Thank you, Amar…

      that’s high praise and very much appreciated.

      However, unlike Mr. Ferri, I am not a fan of dollar cost averaging as I explain in the post above.

  36. Todd says

    Hey Jim,

    I’ve been inhaling your blog (along with Mad Fientist, GCC, and the rest of the FIRE crew) the past 6 months, as my family will be receiving a lump sum payment in January of $50K and if you asked me 6 months ago what I would have done with it, I had no idea.

    So here is the plan based on EVERYTHING I’ve read, and I just wanted to get a vote of confidence from you. As soon as we get it (so no DCA):

    1) Put $10K in our Betterment Emergency Fund allocation (60% bonds/40% stocks) – this tops us off for 6 months of expenses
    2) Put $8K towards a 529 Plan
    3) Put $22K towards my aggressive, Build Wealth Betterment allocation (100% stock)
    4) Have $10K for fun (a nice vacation, some work around the house, a new computer, etc … stuff that we’ve had on our mind, but with the knowledge this money was down the road)

    We have no debt, and currently contribute about $4K per month towards 401Ks/Taxable Account, so are pretty aggressive savers.

    • jlcollinsnh says

      Hi Todd,

      Not knowing where the 50k is coming from or what percentage savings rate the 4k per month represents or if you have kids, I’m at a bit of a disadvantage. But, overall, I’d give your plan a qualified vote of confidence. Some caveats:

      1. 60/40 bonds/stock is a fairly aggressive allocation for a true emergency fund.

      2. I’m not a huge fan of 529 plans, but they can have their place. As long as you understand the rules surrounding them and their limitations.

      4. 10k represents a full 20% of your total lump sum, but I have no idea what it represents of your net worth.

      I have always been more comfortable finding money for fun from the earnings of my investments rather than spending a portion of the capital. Remember once you spend that 10k, not only is it gone forever, everything it could have earned for you over the decades is also gone.

      Before you decide you might give this a read:

      Perhaps not entirely what you hoped to hear, but useful none-the-less.

      • Todd says

        I appreciate the quick response Jim!

        The $4K represents roughly a 38% savings rate post taxes and we have one child (just under a year).

        1) The 60/40 split comes from Betterment’s recommendation for Emergency Funds –

        They made a compelling case which sat right with me (the graphic in the article is pretty convincing)

        2) I’m surprised to hear your take on 529 plans – have you written about this in length anywhere? Are there reasons besides the 10% penalty on earnings if the child chooses not to pursue higher education (that’s the only risk I’ve come across, as I believe contributions can be withdrawn, penalty free, at any time). Would love to know your thoughts a bit further on this one

        4) Once we receive the money, the $10K will be approx. 4% of our net worth (this one is a bit non-negotiable, the money is technically my wife’s, and we’ve put off some major purchases that have been allocated with this portion – I’m happy that she’s gotten on board as much as she has with the FIRE mindset in the last 6 months to allow me to invest the other $40K of it)

        I’ll definitely go back and reread that post before making any final decisions. Thanks again for all your hard work – I actually just watched your interview w/ Mike and Lauren which I enjoyed quite a bit. They do a great job presenting personal finance to the “millennial” generation.

  37. Greg says

    Dear Jim,
    Admire your thoughtful advice and ever pleasant disposition. I do hope to meet you someday on one of your Chataquas. Please straighten me out. AAAAAARRRRGGHH, because I know you’re right on the lump sum investing, but my arrogance is in my way. Help prevent my fall.
    Situation; married, 4 pre college kids, household income 360k. I’m 50. Began investing 2000. Lost 25k in 2001. Scared. Stopped investing 2002-2008. Accumulated cash, 400k in bank account and 350k in 401k/403b. Market tanked 2008/2009 and jumped back in, bought all stocks, all small cap individual equities and small cap etfs in retirement plans. The money doubled over last 6.5 years to 1.5M. In the meantime I’ve been accumulating cash once again and now have 400k in bank account and 350k in 401k/403b. Worse yet I’ve convinced myself I can do it again. Have no debt. Live in a modest home and drive 16 year old car and 13 year old mini van for wife and kids. I am grateful for all the good fortune I’ve had.
    You are always so pleasant but don’t hold back on your critique.
    Best regards Greg

    • dandarc says

      Would it help if I told you that you didn’t beat the S&P 500 over the last 6.5 years?

      July 2009 – February 2016 (that’s about 6.5 years) the S&P 500 returned over 133% with dividends reinvested – doubled + 30%! Results even better for the S&P 500 if you “jumped back in” earlier in 2009. You didn’t do better than this index unless you didn’t jump back in until the very tail end of 2009. Basically if your “jump back in” time frame is October 2008 to October 2009, you did worse than buying the index if your money only doubled.

  38. jlcollinsnh says

    Hi Greg…

    I’m going to give you a bit of insight into my “pleasant disposition” (although those who know me best would say such a thing doesn’t exist).

    Lean in close. I wouldn’t want this to get out. The thing is….

    I don’t care.

    I am not the least bit interested in convincing anybody of anything with this blog. Well, other than my daughter for whom I write it. I’m still a bit amazed that I now have an international audience paying attention.

    For her benefit (and by extension, I suppose, my wider audience), I have expressed my ideas and concepts and the thinking behind them as clearly as I am able. I very much hope she follows them as I believe doing so will make her life far better and will allow her a far greater range of options.

    I suspect it will do the same for anyone else who choses likewise. But as to whether or not they do, I don’t care. Although I will confess it is satisfying when on occasion readers report their own successes based on what they’ve read here.

    But basically if you or anyone else, choses to listen or not makes not a whit of difference in my life. It’s not like you’ll be sending me a percentage of your growing net worth in appreciation. At least, no one has offered so far.

    (Hey! You could be first!)

    As I say on the Disclaimers page:

    “Occasionally I am asked to read some book, article and/or blog and dispute the ideas in them. I simply don’t have the time or inclination to do this. I’m not the least bit interested in trying to persuade anybody of anything.

    “If you read my blog you’ll soon have a very clear idea of my views. You can then read other sources, compare and decide for yourself what resonates.”

    By the same token, if what I say conflicts with your own ideas you must decide for yourself.

    But, of course, on DCA, I am right. 🙂

  39. Honestly Naive says

    Not gonna lie… this terrifies me. I’ve lost way too much money over the years and don’t feel like I can afford another heavy hit. I’m nearly through the ‘Stock Series’ now and plan on selling a rental property this spring. At that point I should have about $200K to invest. I’d love to just stick it all in VTSAX, but the stock market has been creating all time highs for the past year and based on the theory that it rebounds about every 7 years, we are pretty much due for some market correction… no? I understand that the research says that 77% of years the stock market goes up, but what does the research say for years where the market was at all time highs? Are we to assume that the next 12 months is just as likely as any other 12 months to climb?

    • jlcollinsnh says

      No, we are to assume that what the next 12 months holds is entirely unpredictable. There is nothing about recent highs that mean a drop. But there is no reason a drop can’t happen either immediately after your lump sum investment or after your series of dollar cost averaging investments. And one will certainly happen again one day.

      Drops are normal and to be expected, just as they are unpredictable. To benefit from the market’s long term wealth building power you must be able to endure these without panic.

      If this terrifies you, you will almost certainly panic sell during the next drop no matter how you enter the market. If you do, you will have been better off never investing at all.

      You are hoping to time the market, or follow someone who claims they can, and that is a fool’s game.

      Read this:

      and then decide.

      If you are still terrified, better to find a different investment.

      Not gonna lie… 😉

  40. James says

    All very logic Jim and thanks for this brilliant stock series.
    I would like ask you two questions.

    1) What do you think of Value Averaging instead of DCA. It does make way more sense to use VA;
    2) You used 1970-2013 timeframe. What if you used 1930-1950 instead, would you change something?

    • jlcollinsnh says

      Glad you like it, James.

      1. VA is still an averaging approach and as such has the same shortcomings

      2. Sure, if I was around in 1930 (I’m not quite that old) and had a crystal ball I might have changed something. But I don’t have a cyrstal ball, then or now. 😉

  41. Scott says

    To my mind, dollar cost averaging is what happens when you use automatic investing (e.g. 401k contributions), as opposed to something you set out to do. The exception to this would be investing/rebalancing when stocks go “on sale”.

    • jlcollinsnh says

      Automatic investing, a great idea, makes DCA unavoidable.

      With a lump some you have options, and that’s what this post is about.

  42. ed says

    The problem with front-loading, is when it requires scrounging around for money you don’t really have yet under the assumption the market will go up. E.g., if I assume a fixed budget of 16k/year in my 401k, and start off the year with an unsustainable 60% from paycheck, which I know will mean 5% later in the year. Now, I use to do this, and used the same rational against DCA, but then the market did drop. The “on average” statement may be true, but I’m still behind because I had no flexibility to put more in. I’m not convinced that’s a flaw in my psychology. True — don’t wait on the sidelines, but also stay flexible, that’s what my psychology says.

  43. Alex says

    It’s interesting to read all these comments with “but the market has been at all time highs all year!!!” – and then look at the dates of 2014 and 2015. Clearly it was good to pay attention to the valuations and wait, right? 🙂

    • jlcollinsnh says

      Of course, one of these days the market will plunge and then those folks will say/think it proved their point. 😉

      • Alex says

        Exactly. I’m not sure how strong my stomach will be on the next plunge, but it will be very interesting to see how the comments here change if there’s a 24 month bear market. I imagine half will be supportive, trying to help people keep their resolve to stay invested, and the other half using the recent market performance as evidence against the strategy.

  44. Alex says

    First of all, I am so appreciative of your advice – I have been dipping my toes into learning about the investment world after paying off my law school loans, and my grandma ended up leaving me an inheritance of 50k shortly thereafter.

    My dilemma is that I still have things I want to potentially pay for in the next couple of years (wedding, house – I know, I know, you’re not a big fan of houses, but I still want one). I am approaching 30 in a couple of months, so I am still at the early end of my accumulation/investment stage. I’m wondering whether you have any secret caveats for people who want to buy something in the next couple of years, or whether you still say dump the lump sum in to VTSAX.

    • jlcollinsnh says

      Hi Alex…

      Either you haven’t read very far here, or I have failed in communicating. But throughout this blog I have said:

      –Investing in stocks is strictly for the long-term: Think decades.
      –My holding period for VTSAX (stocks) is forever.
      –Short-term savings for goals like a house or wedding belong in cash: Savings accounts, CDs and/or money market funds.

  45. mike says

    Hey Jim, I have another question that comes from my father in law who is not very computer savvy so i am typing it away for him – he got started really late in the retirement investment game. Currently, age 61 and just started his IRA account and a small taxable account with Edward Jones in late 2016. Total value of $ 60K. He realizes he does not have enough time to amass a sizable next egg being on this path and it was at my recommendation he even opened those brokerage accounts. At least that way, he is saving something versus risking it being spent on stuff.

    My question is he will probably need that money in 7-10 years once he retires. Do you think he should stay vested in the equities market given where things are? he is currently holds 70% stocks, 30% bonds. Or should move over to something safer like CDs, T-Bills? I don’t want him to get hit with market correction/crash and have to wait a long time when he is this “close” to retirement age. Am i market timing by thinking that way ? 🙂

    • jlcollinsnh says

      Why Edward Jones? Not the best choice from what I hear.

      But that is not what you are asking. You are asking about his asset allocation and that is dependent on his tolerance for volatility. This post gives some ideas on how to think about that:

      If he plans to use the 4% rule for his withdrawals, having at least 50% in equities is essential. Other wise the portfolio won’t last 30+ years.

      On the other hand, if he plans to spend the 60k at a greater pace to enjoy his earliest retirement years until it is gone, he can tilt more towards bonds or even cash, as in this post:

      • mike says

        Oh yeah….he has never done any market investment before and is really old school. So in order to take action, he needed some hand holding from this edward jones guy that belong to his rotary club. i played along but plan to move it over to vanguard once he is bit more educated.

        he is 61 years old and he’s mentally prepared not to touch it for 7-10 years. my only concern is if market tanks then he might have that much time for recovery to reap the withdrawal benefits. he probably work for another 7-8 years tops.

  46. Jtws says

    Here’s an interesting take on DCA in the Finacial Times

    “The case for drip-feed investing is plausible, but costs more

    Since markets rise more often than they fall, spending lump sums proves a better bet”

  47. Andreas says


    Thanks for this wonderful post. Very insightful for me as I am really at the front end of my investing career figuring out how to enter the market. I do wonder your thoughts on how short-term (3-6 months) dollar cost averaging may play a role in mitigating the risk of entering the market currently with such large market volatility at the present time due to the economic turmoil related to coronavirus. The market has had one of its largest drops in history over the last month with no signs of easing as economic activity has largely stalled. You comment above in Point 1: “By dollar cost averaging you are betting that the market will drop, saving yourself some pain. For any given year the odds of this happening are only ~23%.” With the turmoil still ongoing, would you make exceptions to the claims of lump sum investing > DCA during these times “of much greater uncertainty” (assumption based on continued economic impact of virus), and over the next 6 months invest periodically, say monthly, instead of a lump sum?

    I recently opened my first Vanguard account and have $6000 in a Roth IRA and waiting to buy VTSAX but I’m wondering if I should spread out purchases over the next 3-6 months (as opposed to 12 months in the above example) with minimal signs of economic reversal in sight and a large potential for continued market losses. Obviously, this is a strange time to be entering the market at the beginning of my career but I’m trying to be wise about investing habits for the duration of my life.

    Any thoughts on this short term change in strategy would be much appreciated!


    • jlcollinsnh says

      The only reason to DCA is if it puts your mind at ease.

      The points I make in the post apply regardless of what the market is doing today precisely becasue we don’t know what it will do next.

      DCA and it continues to go down, you win.

      DCA and now is the bottom, you lose.

      The good news is that your are at the beginning of your investing career and the decades ahead are what matter, not how you chose to get in.

  48. Brian says

    Very handy advice in this article and comments as I find myself in a situation with a lump sum in the COVID-bear. A problem that has been plaguing me is what to do with it and when to do it. I think I have a good answer (get it into VTSAX!). As Guy Clark said, “Always trust your cape”. Thank you, JL!

  49. Chris (UK) says

    Here is my experience with dollar-cost averaging (well pound cost averaging as I’m from the UK). Spoiler alert J L Collins has a point 🙂

    So I began my investing journey in January 2018. I decided to invest in Vanguards Life Strategy Fund – 100% stock allocation. I had a lump sum to invest, the stock market was at all-time highs and after such a long bull run I was convinced it would probably end soon. But in case it didn’t end I wanted to have some skin in the game so I began pound cost averaging in. That way when the big crash comes I’ll still have cash on the sidelines and I will clean up. So I steadily bought my way in as the stock markets crept ever higher for the next 2 years. We roll into 2020 and boom! Finally, here it is the big crash I was waiting for, I knew I was right to hold off! I put to work a lot of the cash I had on the sidelines, this is the cheapest the fund has been since I started investing. I feel good, I held my nerve and bought while most were selling. Then I happen to notice something. The price of the fund when I first bought in January 2018 was £210.60, after pound cost averaging in over two years and then loading up in the crash of 2020 the price I paid for my shares averaged out to £210.28. Hmm? Not exactly the big win I was hoping for.

    Here is my stock purchase history as proof –

    Full disclosure, I do still have some more cash to deploy over the coming weeks/months on the theory that the stock decline will continue, so I may get a (slightly) better price, or maybe not? The stock market is rising now, have I missed my opportunity again? I don’t know. Have I actually learned my lesson at all? I guess not. But what I have learned is that:
    1. This investing stuff is a very frustrating head game.
    2. Pound cost averaging may feel better but it doesn’t perform better.
    3. J L Collins knows what he’s talking about.
    4. Sometimes you have to learn the hard way.

    My only hope is that I do not have to learn the hard way that it’s not a good idea to sell all my stocks at the bottom of a bear market, I think that is one J L Collins lesson I can fully appreciate and do not need to experience for myself. Time will tell, I report back if I manage to mess that one up too!

    Thank you for the lessons J L Collins, I will endeavor to be a better student 🙂

  50. Ineke says

    I have never realy understood the benefits of investing a lump sum compared to DCA. After having read this post I understand now. Thank you.

    I invested a lump sum (from sold ETF’s with higher costs) that had been laying around for months because I thought DCA was wiser. Then the market tanked and I put the sum in all at ones, that was pure luck. Then it tanked even more so I put in an extra sum that was sleeping in my savings account. I put it in Vanguard all World (I am in the Netherlands) that I also had been buying on an monthly base from 2017. I still am not recovered from the dip (Who is ;)) but it is getting better. The funny thing is that when all went down and I ‘lost’ about € 20000, I did not even blink because I know that all I have to do is wait. I have time..
    In the meantime I will invest my monthly saving like I always do and wait untill things get better.

  51. Colin says

    Let’s say you’ve been invested for years and now your portfolio totals $120,000. You have the option of moving it all into a money market holding account today, and starting tomorrow you can dollar cost average it all back into the same investments over 12 months. Does it make any sense to do that? I don’t think so.
    Well, every day you leave your portfolio alone is another day that you’ve lump-sum deposited your money into your investment portfolio.

  52. James says

    Hey Jim- I am really enjoying your Stock Series as well as a handful of your interviews posted on YouTube. Thanks for the info. My savings/investments were wiped out after a messy divorce, and now I’m starting all over at age 37. I get paid bi-weekly, and each pay period I’ve been purchasing what little I can afford of Vanguard STAR Fund (VGSTX) into a Roth IRA. Once I get to $3,000, I plan to transfer the investment to VTSAX per your advisement. I guess I was confused, but isn’t this also considered DCA?… that is buying more of the fund through automatic payments at regular intervals?? I don’t have a lump sum and this is my only option. Also can you clarify… when I get to $3,000 and switch over VTSAX, will I get hit with an upfront purchase fee each time I purchase more of the fund (in my case every 2 weeks)? Thanks!


  53. Mike says

    “By dollar cost averaging you are betting that the market will drop”

    DCA a large influx of money isn’t betting the market will drop, it’s hedging against it. Better to see 60% of your money +25% and buy another 20% at a higher price than seeing your entire savings fall to -25%. You might just end up paying more and after 100% DCA then still seeing -25% but still

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